Putting clients' interests first: Financial Advice
By Rebecca Sellers and Luke Leybourne
Lawyers, accountants and real estate agents can currently talk to their clients about investments. Is that about to change?
The Financial Advisers Act 2008 (FAA) regime does not apply to lawyers when they provide a relevant service in the ordinary course of a law business or the service is incidental.1 Teachers, journalists, accountants, real estate agents and MPs also have the benefit of an exclusion from scope. But the current review of the FAA has led to calls for commercial professionals, such as lawyers and accountants, to comply with the full FAA regime.
The FAA seeks to protect investors by regulating financial advisers. It impacts not only the people visiting you to talk about retirement savings, but also those selling insurance for your home or car and most of the people you see when you go into your bank.
The original FAA suffered the indignity of being significantly amended shortly before the regime took effect on 1 July 2011. Because of the late restructuring of the regime, the Minister of Commerce and Consumer Affairs must review and report on the operation of the FAA by 1 July 2016.2
Ripe for review
Parts of the regime are ripe for review. Do clients understand the difference between the different types of adviser? Do you?
Anecdotally, the public recognise a registered financial adviser as being more qualified than an authorised financial adviser. But this is wrong. Only authorised financial advisers (AFAs) can provide financial advice on a full range of investments issued by different financial service providers.
AFAs are required to comply with the Code of Professional Conduct. This requires an AFA to:
- place the interests of the client first, and act with integrity;
- attain the Unit Standard Sets within the National Certificate in Financial Services (Financial Advice) (Level 5) that are relevant to the financial adviser services provided; and
- maintain and keep current a professional development plan and undertake continuing professional training.
Qualifying Financial Entity (QFE) advisers are generally expected to demonstrate a similar standard of behaviour to AFAs for similar work.
Quality of advice
The FAA regime significantly increased the administration and compliance burden for AFAs and QFE advisers. Has this led to a corresponding increase in the quality of advice? Or has the burden of compliance become so heavy, that AFAs are only willing to service customers with significant portfolios of investments?
An outcome that restricts access to quality advice would be entirely contrary to the purpose of the FAA: to promote the sound and efficient delivery of financial adviser and broking services.
Most New Zealanders hold their wealth in their homes and have a life policy, but do not own substantial investment portfolios. This means that, for most New Zealanders, most of their wealth consists of, or is protected by, life or general insurance products (these are called "category 2 products").
KiwiSaver has gone some way towards reintroducing New Zealanders to the capital markets but the balance of most KiwiSaver accounts is relatively small.
It is not necessary to see an AFA to get advice on these financial products that affect the majority of New Zealanders. Advice on category 2 products can be given by a registered financial adviser (RFA).
No competence or expertise is required to become an RFA, solely the ability to complete an online form with details of the adviser's name, address, gender, date of birth, dispute resolution scheme and consent to undergo a criminal history check.
Is this sufficient to protect the wealth of most New Zealanders? Under-insurance has been at the root of many disputes arising from the Christchurch earthquakes. Requiring competency from those who advise on life and property policies would benefit all New Zealanders.
Competency is not the only area needing change. Money is also an issue – and the issue is one of transparency.
Currently, there is no requirement for RFAs to disclose the commission they receive. New Zealanders expect to receive advice for "free" – but it is not free. The customer pays commission through the premium. For a life policy, this will be more than the first year's premium; for a commercial property policy, it may be 35% of the annual premium. How can customers know if they are getting good value if they are not aware of the size of the commission payment – or even that commission is being paid?
Call for change
It is unlikely that a call for change will come from the industry. Product providers rely on RFAs to distribute their products. These product providers may long to reach out directly to customers but currently they are caught by customers' lazy acceptance of the status quo. Lobbying for change could result in your company's products no longer being recommended to customers. So, will the status quo continue?
Australia is struggling with the same issues. Last year the Australian regulator (ASIC) stated that misaligned incentives influenced the quality of life insurance advice.3 David Murray's recent report on the financial system seeks to increase confidence and trust by creating an environment in which financial firms treat customers fairly. The Murray report identified that lifting competency and increasing transparency in remuneration structures aligns the aims of firms and consumers.4 Life insurers and financial advisers set up an industry working group to respond to these criticisms. On 26 March 2015 that industry group recommended a reform model for adviser remuneration, including a recommendation that the maximum initial commission payment be limited to 20% of premium. The FAA review provides an opportunity for New Zealand to make sure all financial advisers put the interests of clients first.
So, can you continue to talk to your clients about their investments?
The reasons why Parliament excluded lawyers from the scope of the FAA regime remain sound: our professional conduct rules already provide sufficient regulation. Lawyers can provide advice only when they are competent to do so.5 The fundamental obligations imposed on all lawyers by the Lawyers and Conveyancers Act 2006 includes the requirement to be independent in providing services to clients and to act in accordance with all fiduciary duties and duties of care owed by lawyers to their clients.6
Look out for the next stage in the review. An initial discussion paper will be issued for public submissions in May 2015. After reviewing submissions, the Ministry of Commerce and Consumer Affairs will develop and consult on an options paper towards the end of 2015. The final report on the operation of the FAA will be provided to the Minister by 1 July 2016. The Minister will then report back to Cabinet with any legislative proposals.
Rebecca Sellers is Special Counsel at EY Law and a member of the New Zealand Law Society's Commercial and Business Law Committee. Luke Leybourne is a law graduate with EY Law.
- For guidance on how these exemptions apply see my.lawsociety.org.nz/in-practice/practice-briefings/Financial-Advicer-legislation.pdf.
- Review of the operation of the Financial Advisers Act 2008 and Financial Service Providers (Registration and Dispute Resolution) Act 2008, Terms of Reference, February 2015,
- "Review of Retail Life Insurance Advice", 9 October 2014, ASIC atasic.gov.au/regulatory-resources/find-a-document/reports/rep-413-review-of-retail-life-insurance-advice/ review-of-financial-advisers-act-2008/faa-review-tor.pdf.
- Financial System Inquiry Final Report – fsi.gov.au/publications/final-report/
- This is required to fulfil their fundamental obligations as lawyers under section 4(c) Lawyers and Conveyancers Act 2006 and to comply with Rule 3 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008
- Law Society Submission –www.lawsociety.org.nz/__data/assets/pdf_file/0006/23757/financial-service-providers.pdf
This article was also published in LawTalk 864, 8 May 2015, page 24.
Last updated on the 22nd July 2015